ZTE Corporation (763.HK)

Transcription

1 INSTITUTIONAL EQUITY RESEARCH ZTE Corporation (763.HK) Continued Strong Growth in H1 Hong Kong Telecom Company report 2 September 2015 ZTE reported a 21.76% increase in revenue to RMB45.9 billion in 1H15. Net profit attributable to shareholders increased by 43.26% yoy to RMB1.616 billion. The result was in line with expectations. As for the breakdown by business segments, reported revenue from carriers` networks was up by 30% yoy to RMB28.5 billion, mainly driven by continued investments in 3G/4G networks from both local and overseas operators. Meanwhile, benefiting from sales of video and network terminal products, revenue from telecommunications software systems, services and other products was up by 41% yoy to RMB7.4 billion. The gross margin increased by 0.6%-point to 30.1%, mainly driven by improved domestic and overseas profit margins from carriers` network businesses, as the merger of Nokia and Alcatel eased the competition among telecommunications equipment suppliers. Moreover, revenue mix was improved following a higher revenue contribution from carriers` networks. We remain positive on the profit outlook of the company. Firstly, domestic carriers will speed up construction of 4G networks. Besides, in overseas markets, demand for the 4G network construction is shifting from developed countries to developing markets. Being the leading player in the telecommunications industry with overseas recognition of its technological edge, ZTE is expected to increase its market share and benefit from a booming global demand for network construction. Moreover, the company actively develops the terminal business and expands its services to government and corporate customers. Buy (Upgrade) CMP: HKD (Closing price at 1 Sep 2015) TARGET: HKD (+42.9%) COMPANY DATA O/S SHARES (MN) : 4,125 MARKET CAP (HKDMN) : 62, WK HI/LO (HKD): 24.85/ 12.4 SHARE HOLDING PATTERN, % ZTE Holdings : PRICE PERFORMANCE, % 1M 3M 1Y ZTE HSI PRICE VS. HSI The R&D expenses of the company broke its record again in 2015H1. After spending RMB25.7 billion in R&D in Q1, R&D expenses reached RMB2.92 billion in Q2 and accounted for 12% of total revenue, exceeding its previous record of 10%. We believe consistently high investment in R&D will help the company build up its long-term competitive advantages in telecommunications and new technological arenas. Speeding Up in Research Development in New Arena The traditional communication business of the company is still booming. The development of its overseas markets may be better than expected due to favorable policies. We expect that its profit will continue to grow steadily. It is worth noting that the company is expanding its investment in research and development and actively developing into new arenas such as wireless charge, Smart City, big data platforms, etc. Its future development will no longer be confined to being a pure equipment supplier. We recommend a BUY rating with target price of HKD21.72, which is based on a P/E ratio of 20x to its 2015 EPS. (Closing price at 1 Sep 2015) Source: Phillip Securities (HK) Research KEY FINANCIALS CNY mn FY13 FY14 FY15E FY16E Net Sales Net Profit EPS, CNY PER, x BVPS, CNY P/BV, x ROE, % Debt/Equity (%) Source: Company reports, Phillip Securities Est. Research Analyst Fan Guohe ( ) fanguohe@phillip.com.cn Page 1 PHILLISECURITIES (HK) RESEARCH

2 Historical P/E Ratio Source: Bloomberg, Phillip Securities (HK) Research Rapid Profit Growth in H1 Based on the interim report, ZTE reported a 21.76% increase in revenue to RMB45.9 billion. Net profit attributable to shareholders increased by 43.26% yoy to RMB1.616 billion. The result was in line with expectations. Improved performance of ZTE Source: Company report, Phillip Securities (HK) Research As for the breakdown by business segments, reported revenue from carriers` networks was up by 30% yoy to RMB28.5 billion, mainly driven by continued investments in 3G/4G networks from both local and overseas operators, investments in wireline switch & access system and optical communication systems. At the same time, benefiting from sales of video and network terminal products, revenue from telecommunications software systems, services and other products was up by 41% yoy to RMB7.4 billion. However, undermined by a decrease in domestic handset sales compared with the same period of last year, the reported revenue from the company`s handset terminals was just RMB10 billion, representing a 4% yoy decline. As for the revenue breakdown by regions, the company has been rapidly expanding its business in Africa, which recorded a 45% yoy increase in revenue. Moreover, revenue growth in China and Asia (ex-china) remained strong at 28% yoy and 23% yoy respectively. Page 2 PHILLISECURITIES (HK) RESEARCH

3 As for profitability, gross margin of the company increased by 0.6%-point to 30.1%, mainly driven by improved domestic and overseas profit margins from carriers` network businesses, as the merger of Nokia and Alcatel eased the competition among telecommunications equipment suppliers. Moreover, revenue mix was improved following a higher revenue contribution from carriers` networks, which also led to a faster growth in the company`s profit than revenue. Recovered gross profit margin Source: Company report, Phillip Securities (HK) Research H2 Growth Momentum Continued to be Strong We remain positive on the profit outlook of the company. Firstly, domestic carriers will speed up construction of 4G networks. Investments in transmission and indoor network coverage are also expected to increase. In domestic markets, China Telecom and China Unicom already announced that they will speed up construction of 4G networks in H2. The former plans to complete its strategy to build 460,000 units of 4G base stations, while the latter expects to complete its strategy to build 1.2 million units of base stations, of which 400,000 to 500,000 units are 4G base stations. This will support the booming trend of the domestic telecommunications equipment market. Besides, in overseas markets, demand for the 4G network construction is shifting from developed countries to developing markets. As China rolls out the One Belt, One Road Strategy, the telecommunications industry, being one of China`s pioneering industries, will speed up its overseas expansion. Being the leading player in the telecommunications industry with overseas recognition of its technological edge, ZTE is expected to increase its market share and benefit from a booming global demand for network construction. Moreover, the company actively develops the terminal business and expands its services to government and corporate customers. In the handset terminals business, the company focuses its branding and sales strategy on the high-end segment, which will expect to improve its profitability. By the end of July, the company released its flagship product AXON, which is expected to improve its sales. At the same time, growth in overseas sales of 4G terminal products is expected to continue. As for the government and corporate business, the company will strengthen its M-ICT development strategy by speeding up the development and construction of railway transport and Smart City. There was already a pick-up in the growth trend of orders in H1. Page 3 PHILLISECURITIES (HK) RESEARCH

4 Sustained Increase in R&D Investment to Build Up Its Long-Term Competitive Advantages The R&D capability of ZTE has been ahead of its peers. As of 2014, the company ranked the third globally in the applications for PCT patents for 5 years in a row. It filed over 60,000 applications for international patents and was granted 17,000 patents. The R&D expenses of the company broke its record again in 2015H1. After spending RMB25.7 billion in R&D in Q1, R&D expenses reached RMB2.92 billion in Q2 and accounted for 12% of total revenue, exceeding its previous record of 10%. % Research & Dev Costs of ZTE Source: Company report, Phillip Securities (HK) Research At present, the company gradually rolls out R&D in LTE, SDN, pre5g, Internet of Things. It also develops into new arenas such as Smart City, new energy and wireless charge. This will broaden the development prospects of the company. We believe consistently high investment in R&D will help the company build up its long-term competitive advantages in telecommunications and new technological arenas. Catalysts Continued booking of large orders from overseas; Progress of FDD-LTE tenders; Gradual roll-out of projects in new arenas. Risks Volatility in exchange rates affecting profitability; Higher operating costs from new business development; Handset sales volume and average prices are below expectations. Page 4 PHILLISECURITIES (HK) RESEARCH

5 Financials FYE F 2016F Valuation Ratios Price Earnings x 16.2x 14.1x 13.0x Price to Book 2.0x 1.9x 1.7x 1.6x 1.5x Dividend Yield 0.0% 0.2% 1.6% 2.2% 2.4% Per share data(rmb) EPS Adjusted (0.83) Book Value Per Share Dividends Per Share Growth& Margin Revenue growth -2.4% -10.7% 8.3% 15.2% 8.3% Gross Profit growth -22.7% 9.6% 15.9% 19.4% 9.0% Net Profit growth % 147.8% 94.0% 28.3% 17.4% Profitability Ratios Gross Margin 23.9% 27.2% 29.1% 30.2% 30.4% Net Profit Margin -3.4% 1.8% 3.2% 3.6% 3.9% Dividend Payout Ratio % 0.0% 7.6% 31.3% 30.2% 31.2% Key Ratios Return on Assets -2.6% 1.3% 2.5% 3.4% 4.2% Return on Equity -12.4% 5.9% 11.1% 12.4% 13.3% Effective Tax Rate -31.3% 21.6% 22.9% 22.2% 22.2% Liability ratio 79.4% 76.9% 76.6% 70.0% 70.0% Income Statement(RMB: mn) Revenue 84,219 75,233 81,471 93, ,680 - Cost of Goods Sold 65,545 54,775 57,759 65,569 70,820 Gross Income 18,674 20,458 23,712 28,302 30,860 - Selling, General & Admin Expenses 23,042 19,802 22,651 26,847 29,080 Operating Income -1,162 2,857 4,849 5,805 6,479 - Interest Expense 1,165 1,045 1,036 1,207 1,301 - Net Non-Operating Losses (Gains) Pretax Income -1,983 1,828 3,538 4,498 5,278 - Income Tax Expense ,172 Income Before XO Items -2,605 1,434 2,728 3,499 4,107 - Minority Interests Net Profit -2,841 1,358 2,634 3,379 3,967 Source: Company, Phillip Securities (HK) Research Estimates (Financial figures as at 1 Sep 2015) Page 5 PHILLISECURITIES (HK) RESEARCH

6 PHILL ZTE(0763 HK) Company report PHILLIP RESEARCH STOCK SELECTION SYSTEMS Total Return Recommendation Rating Remarks >+20% Buy 1 >20% upside from the current price +5% to +20% Accumulate 2 +5% to +20%upside from the current price -5% to +5% Neutral 3 Trade within ± 5% from the current price -5% to -20% Reduce 4-5% to -20% downside from the current price <-20% Sell 5 >20%downside from the current price We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock`s risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation GENERAL DISCLAIMER This publication is prepared by Phillip Securities (Hong Kong) Ltd ( Phillip Securities ). By receiving or reading this publication, you agree to be bound by the terms and limitations set out below. This publication shall not be reproduced in whole or in part, distributed or published by you for any purpose. Phillip Securities shall not be liable for any direct or consequential loss arising from any use of material contained in this publication. The information contained in this publication has been obtained from public sources which Phillip Securities has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the Research ) contained in this publication are based on such information and are expressions of belief only. Phillip Securities has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in this publication is subject to change, and Phillip Securities shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will Phillip Securities be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this material are as of the date indicated and are subject to change at any time without prior notice. This material is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this material may not be suitable for all investors and a person receiving or reading this material should seek advice from a financial adviser regarding the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products. This publication should not be relied upon as authoritative without further being subject to the recipient`s own independent verification and exercise of judgment. The fact that this publication has been made available constitutes neither a recommendation to enter into a particular transaction nor a representation that any product described in this material is suitable or appropriate for the recipient. Recipients should be aware that many of the products which may be described in this publication involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks. Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in this research should take into account existing public information, including any registered prospectus in respect of such security. Disclosure of Interest Analyst Disclosure: Neither the analyst(s) preparing this report nor his associate has any financial interest in or serves as an officer of the listed corporation covered in this report. Firm`s Disclosure: Phillip Securities does not have any investment banking relationship with the listed corporation covered in this report nor any financial interest of 1% or more of the market capitalization in the listed corporation. In addition, no executive staff of Phillip Securities serves as an officer of the listed corporation. Availability The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction. Information contained herein is based on sources that Phillip Securities (Hong Kong) Limited ( PSHK ) believed to be accurate. PSHK does not bear responsibility for any loss occasioned by reliance placed upon the contents hereof. PSHK (or its affiliates or employees) may have positions in relevant investment products. For details of different product`s risks, please visit the Risk Disclosures Statement on Phillip Securities (Hong Kong) Limited Contact Information (Regional Member Companies)

7 PHILL ZTE(0763 HK) Company report SINGAPORE Phillip Securities Pte Ltd Raffles City Tower 250, North Bridge Road #06-00 Singapore Tel : (65) Fax : (65) Website: HONG KONG Phillip Securities (HK) Ltd Exchange Participant of the Stock Exchange of Hong Kong 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax (852) Websites: INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A Jakarta Indonesia Tel (62-21) Fax (62-21) Website: THAILAND Phillip Securities (Thailand) Public Co. Ltd 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok Thailand Tel (66-2) / Fax (66-2) Websitewww.phillip.co.th UNITED KINGDOM King & Shaxson Capital Limited 6th Floor, Candlewick House, 120 Cannon Street, London, EC4N 6AS Tel (44-20) Fax (44-20) Website: MALAYSIA Phillip Capital Management Sdn Bhd B-3-6 Block B Level 3 Megan Avenue II, No. 12, Jalan Yap Kwan Seng, Kuala Lumpur Tel (603) Fax (603) Website: JAPAN PhillipCapital Japan K.K. Nagata-cho Bldg., 8F, Nagata-cho, Chiyoda-ku, Tokyo Tel (81-3) Fax (81-3) Website: CHINA Phillip Financial Advisory (Shanghai) Co. Ltd No 436 Hengfeng Road, Greentech Unit 604, Postal code Tel (86-21) Fax (86-21) Website: FRANCE King & Shaxson Capital Limited 3rd Floor, 35 Rue de la Bienfaisance Paris France Tel (33-1) Fax (33-1) Website: UNITED STATES Phillip Futures Inc 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL USA Tel Fax AUSTRALIA PhillipCapital Australia Level 12, 15 William Street, Melbourne, Victoria 3000, Australia Tel (613) Fax (613) Website: